The 9 Things Driving Prospect Capital Corporation

Prospect Capital Corporation is one of the biggest BDCs in the country -- investing in everything from syndicated loans to airplanes. Understanding its many business lines can be a task in and of itself, but a recent interview helps investors understand the high-level investing activities of the company.

In the following video, Motley Fool Financials Bureau Chief David Hanson and contributor Jordan Wathen interview Grier Eliasek on the going-ons of Prospect Capital's many different business lines.

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A transcript follows the video.

David Hanson: Welcome, Fools, I'm David Hanson and I'm joined in the studio by Jordan Wathen, and on the phone by the President and COO of Prospect Capital, Grier Eliasek. Grier, thanks for joining us today.

Grier Eliasek: Thank you for hosting me today, David and Jordan.

Hanson: We're going to dive right into it. For our listeners, Prospect Capital is one of the largest BDCs out there.

Grier, our first question for you is, a lot of the BDCs, large and small, are predominantly lenders to private equity companies for buyouts, but Prospect is a little bit different. They have their hands in more areas.

Can you give us a really brief overview of your main focus areas, as a business, and also which one of those businesses you get most excited about, looking out into the future?

Eliasek: Sure. With our more than $7 billion capital base, Prospect Capital is the only multi-line business development company. We believe our diversified origination profile gives us access to more investment opportunities than any other BDC.

We review more than 4,000 opportunities per annum across our 100-person team, so we can afford to be disciplined in our credit selection, and we close less than 2% of the opportunities that we review.

Also, if a BDC just has a pure credit book, that BDC can only go in one direction -- down, through defaults. Because we own controlling interests in many of our companies, we also capture the upside if those companies perform well. Those investments generally require larger check sizes, and have higher personnel/staffing requirements, which allows us to box out our competitors and use our scale to our advantage.

We have nine origination strategies. The first is sponsor finance, or lending money to private equity-owned companies, which is our largest segment. We generate significant repeat business, given our 26-year history as a company, and we also win significant business because we can write $50 to $300 million checks per deal, which smaller BDCs do not have the capital base to do.

Next up is direct lending, or lending money to non-institutionally owned companies. We have an internal cost center that calls on thousands of intermediaries to source proprietary deals in this highly inefficient market segment.

The third is operating buyouts, where we purchase a controlling interest in a company, alongside management, and also generally provide all the term debt to that company. We've had terrific success with our exits here, including exiting Gas Solutions and NRG manufacturing. These are a couple of deals that we exited a couple of years back, making 6-8 times our initial investment.

Then we do financial buyouts, which is the same as operating buyouts, except we can purchase these lending businesses in a tax-efficient manner, through partnerships. We own multiple such companies today, and are generating over 18% yields from this strategy.

Then we also do CLO equity, also known as structured credit, where we purchase majority interests in pools of syndicated loans against large corporate credits, and then we obtain financing from the investing grade market. We're generating over 20% cash yields from that business.

We also do real estate, where we own multiple private REITs and focus on purchasing garden style apartment complexes, generally across the Southeast, at favorable cap rates and long-term financing.

We also do online direct lending, which is a significant growth market focused on both consumers and small businesses.

We do aircraft leasing with an emphasis on midlife aircraft leased by credit-worthy airlines around the globe.

Then finally, syndicated debt investing, where we act as a liquidity bid when credit markets retract. That's a fairly dormant business for us right now.

We're excited about many of these businesses. If I had to highlight one area, it might be structured credit -- our CLO equity business. Prospect is the largest investor in U.S. CLO equity on the planet, and our book is performing well. Defaults are near zero, our vintages are spread across multiple years, and we have partnerships with the leading collateral managers around the world.